Grandfathered Health Plans – What They Are and Why They're Important
This is the second in a series of WorkCite articles concerning the recently enacted Patient Protection and Affordable Care Act (PPACA) and its companion bill, the Health Care and Education Reconciliation Act of 2010 (referred to collectively as the Act). This article relates to "grandfathered health plans" under the Act.
Grandfathered health plans occupy an important position for many employers in understanding the implications of the Act. The law provides that grandfathered health plans do not have to comply with a number of the new requirements. Unfortunately, at the last minute in the legislative process, some significant benefits of being a grandfathered plan were eliminated. However, there are still numerous advantages to being a grandfathered plan. An employer should consider the benefits of grandfathered plan status in planning for compliance with the new law.
What is a Grandfathered Plan?
To be a grandfathered health plan, a group health plan or individual coverage must have been in effect on March 23, 2010, the date of the Act's enactment. The law generally allows a grandfathered plan to continue its normal operations without losing its grandfathered status. New employees may enroll in a grandfathered plan, and current participants may reenroll or change coverage to add dependents to the health plan. The possible effects of other plan changes on grandfathered plan status are discussed below.
In addition, there are special rules for collectively bargained plans in effect on March 23, 2010. The special rules apply to multiemployer and single employer collectively bargained plans. These collectively bargained plans will not be subject to the rules until the date on which the last of the collective bargaining agreements relating to the coverage terminates.
When that CBA terminates, a collectively bargained plan is then subject to new rules. It is not clear in the Act that the collectively bargained plan can then assume status as a grandfathered health plan, however, that is the most likely result. In addition, a collectively bargained plan may adopt some of the new law rules without having to comply with all of the new rules.
What are the Benefits of Being a Grandfathered Plan?
Grandfathered plans are exempt from only some of the Act's requirements. Also, certain provisions have specific effective dates, noted below. Listed first are many of the provisions that will not apply to grandfathered plans according to the Act:
Effective for the first plan year beginning on or after Sept. 23, 2010, (Jan. 1, 2011, for calendar year plans).
"Highly Compensated" Nondiscrimination Rules
Grandfathered plans that are insured plans will not be subject to the nondiscrimination rules of Internal Revenue Code Section 105(h). Section 105(h) prohibits a covered health plan from discriminating in favor of highly compensated employees as to eligibility to participate or benefits provided. Previously, Code Section 105(h) applied only to self-funded health plans.
The Act expands the application of these rules (effective for plan years beginning after March 23, 2010) to include all insured plans that are not grandfathered. Avoiding the application of Code Section 105(h) will be a critical issue for many employers who sponsor insured plans that provide different levels of benefits to different workforces or groups.
Without grandfathering, insured plans – even if created with no intent to favor highly compensated employees – may not comply with Code Section 105(h). While the Act's penalty for an insured plan violating these requirements (a fine) is less onerous than the tax consequences of a violation of Code Section 105(h) by a self-insured plan, the penalty could be substantial. Thus, employers who wish to avoid including insured plans in their Section 105(h) testing should take care to ensure that such plans maintain their grandfathered status.
Essential Benefits & Cost Sharing
Grandfathered plans do not have to provide "essential benefits" without any cost sharing for those benefits.
Appeals & External Reviews
Grandfathered plans are exempt from the requirement that group health plans must establish and maintain a claims and appeal process that includes external review. The external review must allow participants to present evidence and testimony on appeal, and must provide that the participants' coverage continues during the claims process.
Preventive Care
Grandfathered plans do not have to provide the specified preventive care that other group health plans must provide. These preventive care services include certain immunizations and screenings, and must be provided by non-grandfathered plans with no cost-sharing to the participant.
Emergency Services
Under the Act, group health plans must provide emergency services without prior certification and allow out-of-network expenses under the same cost structure applicable to in-network emergency services. This provision does not apply to grandfathered plans.
Provider Choice
Grandfathered plans are not required to provide an individual with the choice of a primary care physician, do not need to permit an individual to choose a pediatrician as a primary care physician, and do not need to permit women direct access to an obstetrician or gynecologist.
Clinical Trials
Grandfathered plans can continue to exclude coverage for a treatment solely because it is part of a clinical trial.
Annual Reports
Grandfathered plans will not need to provide annual reports to the Secretary of Health and Human Services regarding healthcare quality and wellness programs.
Effective for the plan year beginning on or after Jan. 1, 2014.
Cost-sharing Limits
Beginning in 2014, the Act prohibits health plans from imposing total cost sharing for a year that exceeds the out-of-pocket limits that are applicable to high-deductible health plans. Currently, these limits are $5,950 for individual coverage and $11,900 for family coverage. Also in 2014, the Act will limit the maximum deductible to $2,000 for individual coverage and $4,000 for family coverage. Grandfathered plans will remain exempt from both the cost-sharing limit and the deductible requirement.
Which Rules Do Apply to Grandfathered Plans?
As outlined above, grandfathered plans can avoid many of the requirements of the new Act. Some significant changes implemented by the Act do apply to grandfathered plans. Except for the delayed effective date for full coverage of adult dependents, the following provisions apply for the first plan year beginning on or after Sept. 23, 2010, (Jan. 1, 2011, for calendar year plans).
Dependent Coverage
All group health plans must provide coverage for adult dependent children up to age 26. Prior to Jan. 1, 2014, this rule applies to grandfathered plans only if the child is not eligible for coverage under another employer-sponsored plan.
Pre-existing Conditions
The Act prohibits preexisting condition exclusions for enrollees under the age of 19 and for all enrollees in 2014.
Rescission of Coverage
Coverage under a group health plan may not be rescinded for a participant except in the case of fraud or intentional misrepresentation by the participant.
Coverage Limits
The Act prohibits group health plans from applying a lifetime limit on the value of "essential benefits" for any plan participant or beneficiary. In addition, the Act permits only "restricted annual limits" (as defined by HHS regulations) on the dollar value of essential benefits provided to a plan participant or beneficiary.
The following provisions will apply to grandfathered plans (as with all other group health plans) for plan years beginning on or after Jan. 1, 2014.
Waiting Periods
A plan may not have a waiting period in excess of 90 days for a new enrollee.
Pre-existing Condition Exclusions
Under the Act, all group health plans and insurers will be prohibited from denying health coverage for preexisting conditions.
Coverage Limits
The Act prohibits annual limits altogether beginning in 2014.
What Might Preserve – or Change – Grandfathered Status?
The provisions of the Act about grandfathered health plans only define a starting point; many questions remain and most will only be answered when guidance is issued. One of the key questions is what events or modifications, if any, to group health plans will alter grandfathered plan status.
The statutory language allows the following events to occur without changing grandfathered status:
- Participants in a grandfathered plan may renew their coverage (for example, during the next open enrollment) after the date of enactment.
- Participants may enroll their dependents for coverage, including dependents who were not covered at the date of enactment.
- New employees and their dependents may be enrolled in a grandfathered plan.
In addition to the enrollments described above, the Act notes that coverage amendments made to conform a collectively bargained plan to the new requirements will not be treated as a termination of the collective bargaining agreement. This implies that the grandfathered plan that is being amended does not lose its grandfathered status by making conforming amendments and should apply to non-bargained plans as well. On this basis, amendments required for compliance with other provisions of the Act or other applicable law (for example, updates for HIPAA HITECH) would not alter grandfathered status.
The impact of other modifications (design changes, coverage changes, the addition of new programs or a change of service providers) on grandfathered status is not addressed, and there is little basis in prior law to project an answer. Until guidance is issued, plan sponsors should proceed with caution so grandfathered status is not inadvertently lost.
At this time, employers should consider the following steps to identify and preserve grandfathered status for plans that were in existence on March 23, 2010:
- Prepare a list of each plan maintained by? the employer that qualifies for grandfathered status to be used with service providers, benefits staff and others.
- Do not adopt restatements of plan documents until further guidance is issued.
- Identify amendments that must be made (for compliance with the Act or other applicable law) prior to the end of this plan year. Have this list reviewed by counsel to avoid amendments that may affect grandfathered status.
- Issue instructions to relevant parties (benefits staff, internal administrative committees, human resource managers, procurement department, etc.) stating that? any changes to the plan (other than amendments described above) must be approved by a designated officer or staff member, with legal review as required. This includes adding new programs, changing vendors, and negotiating contracts with service providers.
- Reserve the right to further review and revision regarding any necessary changes made prior to the issuance of guidance.
- When grandfathered plan guidance is issued, review and implement further changes as necessary.
Although there has been no guidance regarding grandfathered status issued yet, the regulatory agencies have dedicated teams working to meet very aggressive deadlines for guidance. The Departments of Labor, Health and Human Services and Treasury are coordinating efforts to produce guidance, similar to the process employed when HIPAA guidance was issued.
Information about grandfathered status is essential to understanding and implementing so many of the new provisions relating to employer-sponsored group health plans and should be among the first guidance to be released. We will issue updates on this topic as the guidance becomes available.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.